Personal Finance.

Card Sharks Are In Season

Be Wary Of Discounts And Rebates As You Shop Around For Good Credit Deals

November 23, 1993|By Kathy Kristof, Los Angeles Times Syndicate.

Just in time for the holidays, vendors of everything from gasoline to clothing are revving up special deals to entice people to use their credit cards.

At Sears, for example, new credit card customers get $5 off their first purchase. Existing credit card customers will get additional $5-off coupons throughout the holidays, a spokesman adds.

Robinsons/May offers $10 off the first credit card purchase and 90-day deferred billing. J.C. Penney offers a three-month hiatus from bills and interest charges for those who use its card to buy furniture before Dec. 15. Penneys also gives a 15 percent discount on the first purchase made with a new Penneys card at any time of year. And Macy's promotes its credit cards year-round with a 10 percent discount on the customer's first two purchases, a spokeswoman says.

The reason retailers offer these special deals is clear, says Edward Weller, retail analyst at Robertson, Stephens & Co. in San Francisco.

Studies show that credit card customers shop more often and spend more money per visit. The average retailer can boost sales 10 percent by securing credit card accounts, he adds. Additionally, it's easy to contact and track purchasing patterns of credit card customers, Weller says. That's valuable marketing information.

Then, too, the winter holidays kick off the biggest spending months of the year. So, if having a credit card encourages consumers to concentrate holiday shopping in one spot, retailers receive immediate dividends.

The question is whether these deals are as good for customers as they are for the companies that offer them. And that's not an easy question to answer.

While most of the deals seem to provide obvious benefits-like cut-rate prices on one or more purchases-if you're not careful, you can spend more than you save.

How so?

Consider the Macy's card, which offers some of the most generous discounts.

You go shopping one day and, as you start to check out with your $250 Macy's clothing purchase, somebody tells you about the credit card discount deal. You take it and get $25 off that day's bill.

Then, when you get your permanent card in the mail, it comes with another 10 percent discount coupon. You go shopping and ring up another $200-minus your $20 discount.

If you pay off your charges immediately and if you don't buy more-or shun less expensive stores-simply because you have a Macy's credit card, using this card for your purchases puts you $45 ahead.

But if you leave a balance on your card, you lose. Macy's card has just a five-day grace period-the amount of time you have to pay off your balance before facing finance charges-and, in most states, it costs 21.6 percent annually. In other words, if you leave a $500 balance on that card for one year, you'll pay roughly $108 in finance charges-or 2.4 times what you saved with the shopping discounts.

An unusual example? Hardly. Retailers commonly charge between 18 and 22 percent on store credit cards in every state except Arkansas, where usury laws are unusually strict.

Even when the interest rate is slightly better, consumers who maintain balances often miss out by looking at the discount or rebate rather than the credit card's terms, says Gerri Detweiler, president of Bankcard Holders of America, a Herndon, Va., consumers group.

Last month, Shell Oil and Chemical Bank launched their MasterCard with great fanfare, for example. The terms of this card are tough to explain because they vary based on your credit rating, when you apply and how you found out about the card, according to Shell.

Every purchase you make with the card-clothes, shoes, meals and so on-earns you a 2 percent rebate on Shell gasoline. If you buy Shell gasoline with the card, you get a 3 percent rebate on future Shell gas purchases.

That means that the average bank card customer, who carries about a $2,200 balance on the card, would earn between $44 and $66 in gasoline rebates each year. Meanwhile, he or she would spend $330 in annual finance charges.

If they got a lower-rate card-there are numerous cards now offered at rates below 10 percent-they'd pay less than $220 in finance charges. Even taking the rebates into account, they would be $34 and $54 richer by going for the lower rate. And they could buy gasoline where ever they wanted.

"The typical consumer is better off getting a low-rate card and just buying what they need (full price)," says Detweiler. "The extra interest costs of the rebate cards usually outweigh the benefits."